While the Federal Reserve should soften its monetary policy from September, the European Central Bank should opt for two new rate drops before a break.
The Fed retains a margin to soften its monetary policy
According to our central scenario, we anticipate a relaxation of American monetary policy from September. This vision is based on the conviction that customs duties would have a very limited impact on inflation in the United States, while the global rebalancing of supply and demand should accentuate the deceleration of prices, both for goods and for services. The drop in prices for energy raw materials has also drawn overall indicators. The underlying inflation benefited from this dynamic, as well as the rebalancing between supply and demand.
The specific readjustment of the American job market must be closely followed. We observe a slowdown in the dynamics of job creation, mainly linked to the uncertainty observed in the first half, which slowed down the capacity of companies to plan their investments and their hires. This evolution could weigh on wage growth and, ultimately, on the inflation of services. Jerome Powell stresses that the FOMC will assess the gap between real inflation and employment data and their respective objectives, and that this reaction function will probably serve as a compass until the end of the year. A probable cooling of the labor market, combined with inflation converging around 2%, could encourage the Fed to react more quickly, with a cumulative drop of 50 to 75 bases of the Fed Funds by the end of the year.
ECB: Two new rate drops before a break
The current scenario of the European Central Bank provides for another decreases of 25 base points before a break in its softening cycle. This orientation is explained by increased disinflationist pressures, resulting from a euro stronger than anticipated and the fall in the prices of energy raw materials. The disinflation of underlying prices also seems to follow the right trajectory, as recently pointed out Philip Lane, chief economist of the ECB, about deflationary pressures on the basket of goods (the re-redeem of manufactured goods in China to the common market exerts a downward pressure on this component of the consumption basket). The net slowdown in wage growth should also promote gradual normalization of services inflation by the end of 2026, according to the BCE wage monitoring indicator.